Cars Are Money Pits and Kill Wealth Building

Raise your hand if you’ve heard the following: “Cars depreciate 20% when you drive off the lot.”

I had heard that many times in my life, but it never really sunk in until later in life when I started analyzing common expenses and building wealth. My goal with this post is for that saying (and MUCH more) to sink in, regarding what buying cars (especially new cars) does to your wealth building.

A $30,000 car financed over 5 years is about $500 per month. Most people look at a $500 car payment these days as no big deal. If you’re saving at least 3 x’s that amount per month AND you’re going to keep the car for 10 years, MAYBE you can justify doing 5 years of payments on a 30k car. Maybe. I still don’t advise it, but at least you’re using the car a long time AND you’re saving $1500/month to build wealth. For the rest of you, if you do this your entire life, and have little-to-no wealth built in 30-40 years, you have basically driven multi-million dollars cars your whole life. I hope you really enjoyed them! Because if you had spent less and saved the difference, you would have added millions in wealth. Don’t believe me? Check out these numbers…

If you took your $500 payment and reduced it to $200 per month, and saved the difference ($300 per month) for 40 years, this is how much wealth you would accumulate:

0% return: $144,000

6% return: $557,143.08

8% return: $932,603.47

10% return: $1,593,333.20

12% return: $2,761,529.11

Think of all the people you know that are in their 60’s or later that have driven many large new cars over their lifetime and are broke. Think of all the young people (late teens and 20’s) that drive 30k+ cars. How much are they losing? I used that picture of the 4×4 truck above, because I see so many 20-somethings driving these in the South. It’s nuts. For the record, when I need a new ride, I pay cash for a used, 3 year old, Ford F-150.

Money may not buy happiness, but I’d rather cry in a Jaguar than on a bus.

Françoise Sagan

You will really cry when you see how much money (wealth) you lost on cars over your lifetime.

Mr. Hobo Millionaire

Most people simply do not consider how much they are spending on cars. I have a friend who hasn’t built any wealth, who recently bought a 75k sports car on payments. He’s probably 20 years from retirement. Let’s assume he was going to spend 25k either way to buy a new car… he still spent an extra 50k that will be 100% lost over time. Do you know how much money he REALLY lost because of how that 50k could have increased his wealth:

0% return: $50,000

6% return: $160,356.77

8% return: $233,047.86

10% return: $336,375.00

12% return: $482,314.65

That’s how much that extra 50k in car cost him over the next 20 years.

When you waste money on cars, you are decreasing your wealth… your net worth. If you wanted to “blow money” on something nice, buy a house. Blow all your money on a house. At least it won’t go down 20% in value as soon as you buy it (under normal circumstances). In most cases it will go up in value over time. A car, except in extremely “struck by lightning” circumstances, never goes up in value.

You say, yeah, but I’ve got a to have a new car to be safe or to not worry about it breaking down. That doesn’t take a 30k car. For that matter, you can generally get a really great, safe, used car for 10k. Until you build a large amount of wealth, you should probably drive good, solid, 10k used cars.

Build wealth and you can buy whatever you want when you’re rich. Check out this used car bargain…

Used Lamborghini Gallardo – A Bargain at $100,000 (They Are 500k+ Brand New)

You’re welcome to argue how much you should spend monthly on a car, but you can’t really argue the numbers are astounding for saving just $300 a month over 40 years.

I blog about money, financial independence (FIRE), life, and entrepreneurship. I got rich slowly (over 20+ years) with a niche software business. I also failed at a number of other things (and mild success with a few others). I share what I did right along the way, and a lot of what I did wrong, with a goal to encourage you think differently about life and money.

Related Posts

2 Comments

Hmm. I find it telling that you 1) don’t put an interest rate that is generally more attainable for most people – 4% – in the examples, and 2) you don’t include finance interest rates when talking about this. Oh, and 3) some of us have a lot of ego invested in vehicles, which is, of course, what drives (seewhatididthere) us to purchase “sexy” vehicles – whatever “sexy” might mean to each of us indvidually. You can show off a car much more easily than you can show off a bank account or investments. I’m not advocating it as the RIGHT thing to do – just the reality.

1. I start at 6%, because 7-10% is the general return of the stock market if you are invested in a broad index fund (check out VTI or VOO as an ETF index or VTSAX as a mutual fund — from Vanguard). If you’re older, trying to play it safe, and are heavy bonds, a 4% return might be acceptable. I’m personally going to stay at least 90% VTI until I die. I’m 100% in it right now, and have been for a number of years.

2. I don’t discuss finance rates, because they don’t matter. If anything, they make all the math WORSE. It can be financed at 0%, and all the math I showed you is still correct. If you’re not investing your money, you’re losing it.

3. I completely get the ego aspect of cars. I promise. If you would like a confession, I bought cars in my 20’s and 30’s I had no business buying. I bought a new Pontiac Grand Am while I was going to college, and I bought a 350Z and a Cadillac Escalade in my 30’s. Those two were bought used, but I still had no business buying them. I had a negative networth at the time, and the much of the math I showed above applied to me personally. Don’t make the same mistakes I did.